Remittances and informal work

Abstract

PurposeThe purpose of this paper is to explore the effect of remittances on informal employment in the migrants’ countries of origin, looking both at the remittance-receiving and non-migrant households.Design/methodology/approachUsing data from a large survey conducted in six transition economies of Eastern Europe and Central Asia, the determinants of three labour market outcomes – not working, working formally and working informally – are estimated in a multinomial probit model. The endogeneity of remittances is dealt with instrumental variables following the two-stage residual inclusion technique. To assess possible impact of remittances on non-migrant households, conditional correlations between the labour market outcomes of non-migrant households and the region-level share of remittance receivers are obtained.FindingsBoth correlational and instrumental variable analyses suggest that that receiving remittances increases the likelihood of working informally. At the regional level, high prevalence of remittances is associated with a higher likelihood of informal work among the non-migrant households. Migration and remittances may thus be contributing to informal employment in migration-sending countries.Research limitations/implicationsThe empirical analysis is based on cross-sectional data, which do not allow isolating the effects of unobserved respondent heterogeneity. To deal with this issue, future research could use panel data.Originality/valueThe study explicitly considers the effects of remittances on formal and informal employment of remittances receivers as well as people who do not receive remittances. It advances the understanding of what drives informality in developing and transition economies.